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U.S. economy suffers worst year since 2002

WASHINGTON&ndash;The economy nearly stalled in the fourth quarter with a growth rate of just 0.6 per cent, capping its worst year since 2002.

By JEANNINE AVERSAThe Associated Press

Wed., Jan. 30, 2008

WASHINGTON–The economy nearly stalled in the fourth quarter with a growth rate of just 0.6 per cent, capping its worst year since 2002.

The Commerce Department's report on the gross domestic product, released Wednesday, showed an economy that had deteriorated considerably during the October-to-December quarter as worsening problems in the housing market and harder-to-get credit made individuals and businesses more cautious in their spending. Fears of a recession have grown.

For all of 2007, the economy grew by just 2.2 per cent, the weakest performance in five years, when the country was struggling to recover from the 2001 recession. The housing collapse dealt the economy its biggest blow last year. Builders slashed spending on housing projects by 16.9 per cent on an annualized basis, the most in 25 years.

"The economy has been subject to something of the perfect storm here. It has been hit by the housing slump the credit squeeze, the subprime slime and stock price declines on Wall Street," said economist Ken Mayland, president of ClearView Economics. "The economy is weathering some pretty stormy seas but it is weak.''

The fourth-quarter's performance was much weaker – half the pace – than economists were expecting. They were forecasting growth to clock in a 1.2 per cent pace.

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The 0.6 per cent annualized increase in gross domestic product (GDP) marked a big loss of momentum from the third quarter's brisk, 4.9 per cent showing. The fourth-quarter pace was the slowest since the first quarter of last year.

The GDP figures come as worries mount that the country is on the verge of a recession or perhaps is already sliding into one.

To help bolster the economy, the Federal Reserve was poised Wednesday to again cut interest rates. An afternoon announcement was expected.

The fragile economic situation has spurred rare cooperation among Democrats, Republicans and the White House to quickly enact legislation to stimulate the economy.

GDP measures the value of all goods and services produced within the United States and is the best barometer of the country's economic health.

Consumers whose spending is critical to the economy's well-being tightened their belts.

In the fourth quarter, consumer spending slowed to a pace of 2 per cent, down from a 2.8 per cent growth rate in the prior quarter. For all of last year, consumers boosted spending by 2.9 per cent, the smallest increase since 2003.

Businesses also watched their spending more closely during the final quarter of last year. Fearing a lessening appetite from their customers, they cut inventories of goods. That shaved 1.25 percentage points from fourth-quarter GDP, the most in a year.

Spending by businesses on equipment and software slowed to a pace of 3.8 per cent in the fourth quarter. For the year, such spending was up just 1.4 per cent, the worst showing since 2002.

Sales of U.S. goods and services abroad also slowed sharply in the fourth quarter. Exports grew at a 3.9 percent pace, compared with a sizzling 19.1 percent growth rate in the third quarter. That strong export growth was a key reason why the economy performed so well as a whole in the prior quarter. For all of 2007, exports grew by 7.9 percent, the slowest in two years.

Meanwhile, inflation picked up sharply during the final quarter. However, for all of 2007, it moderated slightly.

A gauge of inflation linked to the GDP report showed that ``core" prices – excluding food and energy – grew at a rate of 2.7 per cent in the fourth quarter. That was up from a 2 percent rate in the prior quarter and was the biggest quarterly increase since the spring of 2006.

For all of last year, core prices went up 2.1 percent, down from 2.2 percent in 2006.

High energy prices are a double-edged sword. They can put a damper on growth and also stoke inflation, which would be a dangerous combination for the economy.

The inflation figures could complicate the Fed's job of trying to energize overall economic growth while also keeping inflation under control.

Some analysts think the economy is on pace to recede from January through March. Under one rough rule, the economy would have to contract for six months in a row for the country is considered to be in a recession. The odds of a recession have risen sharply over the last year, and analysts increasingly believe the U.S. will be in one during the first half of this year.

The big worry is that consumers will clamp down on spending and businesses will put a lid on capital spending and hiring, throwing the economy into a tailspin.

The collapse of the housing market, soured mortgage investments and much harder-to-get credit are weighing on people and businesses alike. Foreclosures have hit record highs and banks have wracked up multibillion losses. The fallout has shaken Wall Street, catapulted the economy as Topic A among voters and galvanized political figures, including those vying to be the next president.

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